November 8, 2009 in Business

Keep an eye on CAT as a guide to economy

Universal Press Syndicate
 

Global giants such as heavy equipment maker Caterpillar (NYSE: CAT) can offer clues about the health – or lack thereof – of the U.S. and global economies.

Caterpillar recently reported some bad and not-so-bad quarterly results. It earned $404 million in its third quarter, down 53 percent from last year’s levels. As you’d expect, the decline was due primarily to a reduction in volume. On the flip side, however, Caterpillar benefited from cost reductions, a smaller employee base (17,000 fewer workers than last year), and a lower effective tax rate, among other things.

During the company’s conference call, management noted that “Over the past year, we have seen an extraordinarily steep drop in demand in the industries we serve.” Yes, that does sound ominous. But looking ahead, CEO Jim Owens observed, “We are seeing encouraging signs that indicate a recovery may be under way.” For 2009, management is now forecasting higher profits, and for 2010 it anticipates sales and revenues improving by 10 percent to 25 percent from the midpoint of 2009 expectations.

To keep your finger on the pulse of the global economy, watch Caterpillar and other industrial bellwethers, such as Dow Chemical and Ingersoll-Rand, closely. And if you’d like to profit from our eventual economic recovery, consider adding Caterpillar to your watch list.

Ask the Fool

Q: Where can I find out when a company’s recent stock splits were? I’d also like to see a chart that shows me how the stock performed after its splits. – F.R., Tampa, Fla.

A: A good source is the horse’s mouth. Call the company’s investor relations department and ask. If you’re online, head to finance.yahoo.com, enter the company’s ticker symbol, and click “get quotes.” Then choose “Basic Chart” in the blue box on the left. Right under the chart and above more data you’ll find a list of recent splits. For lists of past and upcoming splits, visit http://biz.yahoo.com/ c/s.html.

Just don’t give stock splits undue importance. Suddenly owning more shares can be exciting, but it’s not too meaningful. Pre-split, you might have owned 100 shares priced at $50 per share (total value: $5,000). Post-split, your 200 shares are worth about $25 each, for a total of … $5,000. Not much has changed.

My dumbest investment

My dumbest investment happened when I got a tip from a friend about a manufacturer of imaging equipment that had developed a way to detect breast cancer without having to compress a woman’s breast (as is done in today’s mammography machines). I’m not a woman, but that sure seemed like a welcome development. The bottom line is that the last time I checked, my $3,000 investment was worth less than $4. – L.M.B., Maiden, N.C.

The Fool Responds: It’s easy to get excited by companies with revolutionary products, such as cures for cancer, or hints of great profits, such as via discoveries of gold. You have to look more closely at these companies, though. A good idea isn’t enough. Does the firm have enough cash to start making and selling the product? Will it be priced affordably? Is it healthy, paying its bills and collecting its accounts receivable? Can a competitor quickly materialize and steal profits? Does the miracle cure or gold mine really exist, or is there merely the hope of it? Is management talented and trustworthy? These questions and others are critical to assess before you invest.

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